05 (24) (f)

Merely because Husband is in Corporate Debtor as Managing Director and his wife is Director in Operational Creditor, will not attract Section 5(24)(d) of IBC, 2016 – Viswaroopa Info Services India Pvt. Ltd. Vs. SITI Visions Digital Media Pvt. Ltd. – NCLT New Delhi Bench Court-II

As per the contention of the Corporate Debtor, the Operational Creditor is its related party because Ms. M. Sujatha, the authorized representative/ Director of the Operational Creditor, and her husband (who is Managing Director of CD) are shareholders of Corporate Debtor Company holding together 9% of equity share capital.
The Adjudicating Authority held that both parties have not indicated under which specific Clause of Section 5(24), the Operational Creditor is a related party to Corporate Debtor. Since the Operational Creditor is a Private Limited Company, therefore, we would like to examine the criteria stipulated under Section 5(24)(d) of IBC. Applying Section 5(24) of IBC 2016, on the facts of the case, we found that none of the Directors of the Operational Creditor Company is a Director/Manager in the Corporate Debtor Company. Merely, because one of the Directors i.e., Ms. M. Sujatha in Operational Creditor Company and her husband, who is Managing Director in Corporate Debtor Company who together hold 9% of shares of CD, will not attract Section 5(24) (d) of IBC, 2016.

Merely because Husband is in Corporate Debtor as Managing Director and his wife is Director in Operational Creditor, will not attract Section 5(24)(d) of IBC, 2016 – Viswaroopa Info Services India Pvt. Ltd. Vs. SITI Visions Digital Media Pvt. Ltd. – NCLT New Delhi Bench Court-II Read Post »

The expression ‘control’ in Section 29A(c) of the Code symbolizes only the positive control i.e. that the mere power to block special resolutions of a Company cannot amount to control – Telangana State Trade Promotion Corporation Vs. A.P. Gems & Jewellery Park Pvt. Ltd. & Anr. – NCLAT Chennai

Referring the decision of the Hon’ble Supreme Court in Phoenix ARC Pvt. Ltd. V. Spade Financial Services Ltd. & Ors. (2021) ibclaw.in 03 SC at paragraph 71 to 77 and at 1.4 under the caption Related parties – Interpretation in praesenti paragraph 82-96, NCLAT held that it must be borne in mind that the expression ‘control’ in Section 29A(c) of the Code symbolizes only the positive control i.e. that the mere power to block special resolutions of a Company cannot amount to control. In reality, the word ‘control’ juxtaposed with the term ‘management’ means ‘De facto control of actual management or policy decisions that may be or are in reality taken.

The expression ‘control’ in Section 29A(c) of the Code symbolizes only the positive control i.e. that the mere power to block special resolutions of a Company cannot amount to control – Telangana State Trade Promotion Corporation Vs. A.P. Gems & Jewellery Park Pvt. Ltd. & Anr. – NCLAT Chennai Read Post »

Only those Financial Creditors that are related parties in praesenti would be debarred from CoC under the first proviso to Section 21(2), those related party Financial Creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered by the exclusion thereunder – Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Ltd. and Ors. – Supreme Court

An issue of interpretation in relation to the first proviso of Section 21(2) is whether the disqualification under the proviso would attach to a financial creditor only in praesenti, or if the disqualification also extends to those financial creditors who were related to the corporate debtor at the time of acquiring the debt. Thus, facially, it would appear that the use of the simple present tense in the first proviso to Section 21(2) indicates that the disqualification applies in praesenti. Furthermore, this interpretation would also be supported by a reading of the first proviso to Section 21(2), in light of the definition of ‘related party’ under Section 5(24), which uses phrases such as ‘is accustomed to act’ or ‘is associated’ to define a related party in the present tense.(p82 & 84).

While the default rule under the first proviso to Section 21(2) is that only those financial creditors that are related parties in praesenti would be debarred from the CoC, those related party financial creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered by the exclusion thereunder. Mr Kaul has argued, correctly in our opinion, that if this interpretation is not given to the first proviso of Section 21(2), then a related party financial creditor can devise a mechanism to remove its label of a ‘related party’ before the Corporate Debtor undergoes CIRP, so as to be able to enter the CoC and influence its decision making at the cost of other financial creditors. (p95)

Only those Financial Creditors that are related parties in praesenti would be debarred from CoC under the first proviso to Section 21(2), those related party Financial Creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered by the exclusion thereunder – Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Ltd. and Ors. – Supreme Court Read Post »

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